This morning it was reported that the Core CPI rose 0.3% while Housing Starts fell 10.6%.  Treasury futures are trading a little lower after the news.  A higher CPI number will be an indication of inflation which helps push interest rates higher.  This will put pressure on the December Treasury Bonds and Treasury Notes.  A sharp sell-off in the equity markets could trigger a flight to safety rally in the Treasuries.  Both of these scenarios are possible today which means a two-side trade is likely.  Watch for volatility.  The surprise drop in the housing starts could support the Fed’s notion for interest rates to remain low for a prolonged period of time.  

U.S. Equity futures are trading sideways to lower after an attempt to reach a new high for the week overnight failed.  December E-mini S&P 500 futures made a high this week at 1112.00.  A breakout above this level could trigger a sharp rally to a major 50% price at 1122.00.  The weaker Dollar is expected to provide some support for higher yielding assets.  Contrarian traders will be watching to see if there is a divergence from this trading pattern.  This will signal a short-term top in the equity markets.  The drop in housing starts could be the catalyst for a break today.

The U.S. Dollar is trading lower against all majors as overnight rallies in the stock indices and gold are once again pulling the Dollar lower and signaling renewed demand for higher risk assets.  Weaker equity markets could trigger a reversal of this morning’s weakness.

Even European Central Bank President Trichet couldn’t prolong the rally in the Dollar.  Yesterday he expressed support with Fed Chairman Bernanke in supporting the Dollar.  His comments triggered a short-covering rally which could not be sustained overnight.  ECB member Jean-Claude Juncker said overnight that Trichet did what he had to do, but that the Euro wasn’t high enough to curtail the Euro-Zone recovery.

The December Euro is trading higher and appears to have the momentum to drive past $1.5000 this time.  Certainly, Juncker’s comments have taken out the fear of buying the Euro as it begins to break out above this price.  Traders have been reluctant lately to buy when the market approached this figure out of fear the ECB would try to prevent the currency from advancing further.  Last night’s comments give traders the green-light to begin the move which takes the Euro behind the annual high at $1.5063.

The Bank of England’s minutes show a three-way split in the vote to expand the asset-purchase program.  This is helping to provide support for the December British Pound this morning.  It also signals that the BoE is not likely to expand the program any further at its meeting next month.  It looks at if technical factors may be limiting gains.  Current conditions suggest that the recent rapid rise has put this market in an overbought position.

December Gold touched a new high overnight before backing off slightly.  The lower Dollar is the driving force behind this rally.  Fresh buying from central banks is also helping this market to move higher.  The slight rise in U.S. inflation seems to be having no effect on precious metals this morning.  Unless the Dollar mounts a strong comeback rally, continue to look for gold to appreciate.

January Crude Oil is up this morning.  Overnight the nearby December contract touched $80.00 once again.  Speculator demand for higher risk assets, a firm equity market and a weaker Dollar are also driving this market higher.  Today’s supply and demand report should set the tone for the market for the balance of the day.  With Bernanke calling the economy fragile, demand may continue to be down, thereby driving supply up.  


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